Job Market Paper
Treasury Debt and the Pricing of Short-Term Assets
Abstract: In most advanced economies, the central bank keeps inflation stable by controlling short-term rates. Yet, since the crisis, the supply of short-term debt from the Treasury has been increasingly associated with changes in the yields of short-term money market assets. This puzzling pattern contrasts with the pre-crisis experience and raises questions about the ability of the Fed to fulfill its mandate. In this paper, I document and rationalize these developments in an intermediary asset pricing model with heterogeneous banks subject to a liquidity management problem and regulation. The combination of large amounts of excess reserves, together with a more stringent capital regulation, creates an inaction region in which traditional banks cease to intermediate liquidity to shadow banks. As a consequence, the pricing of reserves disconnects from the pricing of other short-term assets and leaves liquidity premia of these assets free to react to variations in the supply of Treasury bills.
Unconventional Monetary Policy and Funding Liquidity Risk (joint with Adrien d’Avernas, SSE and Matthieu Darracq Pariès, ECB)
Abstract: This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring heterogeneous banks subject to funding risk. When banks are well-capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle between declining asset prices and funding risks arises. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector but fails to reach the shadow banking sector. When the latter sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.
This article was awarded the 2018 Distinguished CESifo Affiliate Award in Macro, Money and International Finance.
A Solution Method for Continuous-Time General Equilibrium Models (joint with Adrien d’Avernas, SSE)
Abstract: We propose an algorithm capable of solving in a fast and standardized way a general class of continuous-time asset pricing models, including heterogeneous agent models. These models typically require to solve for a system composed of a Hamilton-Jacobi-Bellman equation for each agent, coupled with a system of algebraic equations. The resolution of such a system of PDEs is a tedious problem as approximation errors tend to amplify and create explosive dynamics. We rely on a Finite-Difference algorithm and show how using a Brocot-Tree decomposition as advocated by Bonnans, and al. (2004) allows for fast and stable convergence in settings with up to two endogenous and stochastic state variables.
Innovation Diffusion and the Financial Cycle (joint with Adrien d’Avernas, SSE; draft available on request)
Abstract: Following a financial crisis, the diffusion of innovation declines, and productivity growth slows down. This article argues that this pattern can be rationalized in a standard macro-financial model with heterogeneous risk aversion when assuming that implementing innovation is risky. In the model, large adverse shocks to productivity affect risk-tolerant agents more than risk-averse ones and therefore increases aggregate risk aversion. Consistent with empirical observations, the model generates significant time-varying risk premia and hysteresis following financial crises. We derive asset pricing and macro-prudential policy implications of the arising trade-off between short-run growth and financial stability.
How Stable Are Stable Coins? (new draft coming soon!)
Abstract: This paper proposes a theoretical model to analyze the stability of algorithmic stable coins. The model interprets these cryptocurrencies designed to peg their value to an existing official currency as the liability of a virtual bank with rule-based dynamic collateral management. With a perfectly liquid market for the collateral asset, these stable coins are able to avoid bank-runs and maintain the peg under most circumstances. Yet, to be able to do so, a digital bank has to be liquidated when the value of the collateral goes below a certain threshold, thereby creating instability in the supply of the asset. With an imperfect market for the collateral asset, the scheme is not able to rule out the run equilibrium. The analysis points out to potential fragility in existing stable-coin schemes with policy implications for regulators.